Tackling tax avoidance by multinationals
Thomas Pope
@TheIFS
© Institute for Fiscal Studies
#IFSGB2016
Context: multinationals in the political spotlight
• Significant political action in the UK
– Prominent interventions by Public Accounts Committee in last few
years
– Numerous UK Corporate tax policies over the last 5 years
– Business roadmap to be released with the Budget
• OECD Base Erosion and Profit Shifting (BEPS) project completed in
October 2015
– A large multilateral attempt to update the international tax rules
© Institute for Fiscal Studies
How big is the problem?
• HMRC defines avoidance as:
• ‘bending the rules of the tax system to gain a tax advantage
that Parliament never intended...operating within the letter –
but not the spirit – of the law’
• Hard to know the scale of avoidance
• OECD estimate avoidance cost at between $100 billion-$250
billion worldwide: 4-10% of global corporate income tax revenues
© Institute for Fiscal Studies
Corporate tax receipts % GDP, 1979–2014
5.0
4.5
4.0
Percent of GDP
3.5
3.0
2.5
2.0
1.5
1.0
0.5
United Kingdom
Notes and sources: See Figure 8.2 of Green Budget document
© Institute for Fiscal Studies
OECD average
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
0.0
How do we tax multinational companies? (1)
• We need to divide profits between different jurisdictions
• The system does not try to tax profit based on sales
• The principle of the international tax system is that we should tax
profits at source; where the value is created
© Institute for Fiscal Studies
How do we tax multinational companies? (2)
Pharmaceutical drugs
Ideas
Transfer price
££
© Institute for Fiscal Studies
£
How do we tax multinational companies? (3)
• Note that this system, even when applied perfectly, can lead to:
– Large sales and low tax payments
– Large reported profits in low tax jurisdictions
• However, in practice there are avoidance opportunities
– Hard to calculate transfer prices
– Other difficulties arise at the boundaries between tax systems
© Institute for Fiscal Studies
OECD Base Erosion and Profit Shifting (BEPS)
project
• 2 year multilateral attempt to improve the international tax
system, relying on international consensus
• Addressed 15 ‘action points’ looking at different elements of the
rules. Either:
– Changes that all countries have agreed to enact (eg transfer prices)
– OR recommended changes that governments can choose to follow
• Next: implementation
© Institute for Fiscal Studies
Improvements for the UK
• Country by country reporting will help countries target resources
– But it won’t mean avoidance can always be identified
• Changes to the definition of taxable presence in tax treaties
– While it ‘moves the goalposts’ the incentive to cheat it remains
• UK to implement ‘anti-hybrid’ rule from 2017
– Though as a recommended best practice it won’t be implemented
everywhere
• Patent boxes to be modified by July 2016 to be more closely
linked to real activity
– The patent box remains a poorly targeted innovation policy
© Institute for Fiscal Studies
George’s big BEPS decision – interest deductibility
• Many countries, including the UK, have rules to restrict interest
deductibility
• UK has consulted on a change to interest deductibility,
announcement expected at the budget
• OECD rule would restrict interest deducted to a proportion of
operating profit
• A more stringent rule than the current UK provision
• Tradeoff between preventing avoidance and distorting genuine
activity
• Especially for business models that include large amounts of debt
© Institute for Fiscal Studies
The incentive to compete – the elephant in the
room?
• Second tradeoff: between preventing avoidance and maintaining
competitiveness
‘The UK’s current interest rules, which do not significantly restrict
relief for interest, are considered by businesses as a competitive
advantage’. Corporate tax roadmap, 2010
• Minimum standard vs recommendation: countries unwilling to
sacrifice competitive advantage
© Institute for Fiscal Studies
Summary: where do we go from here?
• The BEPS process is an impressive project, but is not a silver bullet
• Underlying problems remain unaddressed
• Only time will tell how effective these measures will be
• Countries face a trade-off between competition and collaboration
• Uncertain effect on UK revenues
• EC published anti-avoidance plan on 28th January 2016
• Depending on how effective these measures prove, we may want
to consider more radical changes, eg allocate profits based on
location of sales
© Institute for Fiscal Studies
0
